Treece: A decade come and gone

As we reflect on the 10-year milestone of Toledo Free Press, we cannot help but review the last decade in the investment business.

Tumultuous does not begin to describe what the U.S. economy, debt and equities markets have experienced during that time. Some of the statistics are troubling, while others are rather impressive, but altogether they have helped shape where our economy currently stands and how we expect to go forward.

In the past 10 years, the Dow Jones Industrial Average increased about 70 percent from 10,800 to around 18,000; the NASDAQ increased about 150 percent from 2,000 to almost 5,000; the S&P increased 76 percent; the U.S. dollar recently hit a 14-year high; 30-year U.S. treasury bond yields dropped from 4.5 percent to near 2.7 percent; we witnessed one of the worst global financial catastrophes the world has ever seen; and history’s largest Ponzi scheme was unraveled.

We have been through two presidents and three Federal Reserve chairpersons, all of whom pursued similar economic policies. Lastly and perhaps most significantly, the federal debt has risen from $7.5 trillion to over $18 trillion, due in large part to quantitative easing, TARP and interest rate policies.

That is a lot of numerical and statistical data to analyze in one paragraph. It is important also to remember that the gains and losses were by no means steady. For example, the Dow was valued at 10,800 in March 2005, but dropped to 6,600 in 2009, then went on a bull market that saw us reach 18,200.

While it is important to understand where we have been and how investments have performed, we cannot act on that information. The only way you made money on the 70 percent rise in the Dow over the past decade is if you invested in the Dow before the rally. However, all the information detailed above has significant value in determining where the economy is heading.

We believe equities are overvalued and have only been experiencing gains due to corporate stock buyback programs and investors who typically purchase debt instruments entering the equity arena in a search for yield. That is not to say that equities will not continue higher in the near term, but we urge extreme caution.

At some point, inflation will become an issue. An economy cannot create the amount of currency that the U.S. has over the past five years with no repercussions. Once velocity picks up and money begins turning over in the economy (which low gas prices may encourage), we expect to see inflation surpass the Fed’s 2 percent target and rates rise in an effort to keep inflation at reasonable levels. The rise in rates will likely increase the value of the U.S. dollar, which will continue to negatively impact the United States’ ability to export.

Congress and the SEC are not doing nearly enough to deter the “Madoff types” or to police large institutional firms in both the commercial and investment banking sectors. At present, leverage is at an all-time high and we have replaced subprime mortgage loans with subprime auto loans. However, regulators have displayed a willingness to fine large firms, extort their fee and allow them to continue to play their dangerous game. It is difficult to say what the results of these reckless actions will be, but it is all too similar to the years leading up to 2008.

The national debt does not concern us nearly as much as it does others. While the number is daunting at $18 trillion, rates are so low that the debt service is not unmanageable. Further, once rates begin to rise, the Fed will likely utilize the Federal Open Market Committee to enter the bond market and buy up the old debt with proceeds from newly issued debt, essentially refinancing the national debt at a more reasonable level. If we fail to address the rise in the national debt and take no action at all, however, then we will have a problem on our hands down the road.

We believe above all else that the next 10 years will present major opportunities to investors, if they know where to look. We expect to see an economic recovery and a stable Dow, but not until after some troubling times. Timing is everything. If you remain calm and patient, the next 10 years will be filled with prosperity and gains.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: Dow Jones’ value all too familiar

The Dow Jones Industrial Average has long been the index most widely recognized as a representation of the equities markets. Speculators and unsophisticated investors will use the value of the Dow as a measure of market value, and invest accordingly.

.

While the Dow is certainly an index that should be tracked and is important to follow, it is hardly the only measure of value in the equities markets. The fact that the Dow is not a consistent index as well (the underlying 30 stocks that comprise the Dow Jones Industrial Average have been changing since the turn of the 20th century, adjusting for non-performers, mergers, or companies that have filed for bankruptcy) makes understanding how to read the Dow all the more difficult. In the last 12 months, some interesting chart patterns have developed, and we believe that the Dow is in the process of establishing its next trend.

Since October 2013, the Dow has yet to experience a 10 percent correction. In February, the index pulled back almost 6.6 percent, then 3.4 percent in April and 4.4 percent in August. At time of writing this article, the Dow has experienced a 3.3 percent drop in the last month.

.

The interesting thing about the February and April drops compared to the August drop is that while they occurred over similar time frames, the first two occurred in sudden drops, while the most recent drop has been a more staggered decline. Another insightful piece of data is how long it took for the Dow to reach its old value following the respective declines.

The Dow started 2014 at about 16,500, and by the beginning of February had fallen to 15,400. The Dow did not hit 16,500 again until April. Following the April decline, it took almost a month to get back to 16,500 again. In mid-July, the Dow had peaked at 17,138, then quickly dropped to 16,370 within three weeks. The old high of 17,138 was not reached again until the beginning of September.

At the time of writing this piece, the Dow has returned a lackluster 1.4 percent year-to-date in 2014. After each of the declines earlier this year, the Dow took anywhere from one to three months to return to previous peaks. With that thought in mind, we have some short-term thoughts on the Dow.

Once a short-term bottom has been reached, there are logically three directions that the Dow could take:

1) The Dow could hit its short-term bottom and rebound to the previous peak in an estimated four- to eight-week time frame.

2) Sellers could panic and de-leverage, causing more substantial losses and signal a coming bear market.

3) The Dow could be establishing a sideways trading pattern.

In no scenario do we see a 20,000 Dow coming any time soon. Essentially, the thought is that unless the Dow Jones sees some violent swings in the coming weeks, the index may very well have low single digit returns for the year.

While we are long-term bullish on the U.S. economy, we have made it no secret that we think large-cap equities are overbought. The biggest concern that we see is that this may not be a short-term downtrend that will be recovered within the quarter. Due to the nature of the declines in such a staggered fashion, this could be the unwinding of excess leverage in the equity markets, or traders who have been bullish since 2010 packing up their bags for the time being.

It is worth noting that we are in no way predicting the direction of the Dow Jones Industrial Average, and that a top or bottom will be impossible to recognize until after the fact. It is also worth noting that while we utilize technical data in managing money, our strategy and focus are more grounded in fundamentals. It is impossible to tell exactly what traders are thinking or how to time the markets precisely. Without doubt, we will be watching the Dow Jones, NASDAQ, S&P 500 and the Russell 2000 very closely in the coming months to track this correction, keeping an eye out for restabilization or the possible beginning of a longer-term bear market for equities.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: What matters most

As November quickly approaches, politicians are beginning to ramp up their fundraising efforts and campaigns for midterm elections. This midterm in particular should be interesting given the never-ending scandals coming out of Washington, foreign policy troubles with the Middle East and Russia, and Congress’s abysmal approval rating.

As of the beginning of September, Gallup reports that the Congressional approval rating is a mere 14 percent, one of the lowest figures ever polled by Gallup in 40 years heading in to a midterm election. This figure has elected officials scrambling to rally their respective bases and play the blame game for the nation’s troubles. If any sitting senators or house members want to maintain their seats, they better pipe down and listen to their constituents, because 80 percent of the country is focusing on one issue alone.

.

Some pundits believe that foreign policy is the number one concern of the country, while others feel that social issues are the number one focus of voters. According to the Wall Street Journal and the Global Strategy Group, the economy remains the number one priority of the American people.

With the Dow Jones Industrial Average hovering around 17,000, many economists presume that gains in equities are correlated with an economic recovery, when in reality gains have been a result of loose monetary policy by the Federal Reserve and the United States Treasury. According to the article, the labor force participation rate is just 62.8%, which is the lowest since the days of Jimmy Carter. Furthermore, median family income dropped by 5 percent from 2010-13, and only 16 percent of Americans polled believe that the next generation will have better job opportunities than this generation. From these figures we can deduce one very clear fact; the economy is not improving.

Congress can make changes to encourage job growth within the United States and put us back on the right track. Some simple changes can be made to our government’s view on regulation and energy policy for starters, but our elected officials seem more hell-bent on fighting amongst each other rather than passing legislation that will encourage hiring. If politicians listened to voters, they would know that inaction will not fly this midterm.

The Global Strategy Group found after surveying 3,000 Americans that 78 percent found it important that Congress focus on an economic based agenda benefitting all Americans, while strategies to spread wealth more evenly and reduce income inequality received the least support in that poll. When asked about economic growth and income inequality, 53 percent said that economic growth was extremely important, compared to only 30 percent feeling that way about income inequality.

The single most important statistic from that article was this; 80 percent of respondents favored candidates that were more geared towards economic growth, compared to only 16 percent who favored candidates that were campaigning on reducing income inequality.

The people have spoken loud and clear; Americans are tired of gridlock, tired of infighting, and tired of feeling like their elected officials do not share the same values and concerns. This election is going to be all about the economy, and given how dismal numbers have been over the last 12 months, it would not surprise us to see some new faces heading to Washington.

Ben Treece is a 2009 fraduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: Preparing for wealth

Contributors over at MarketWatch must be avid readers of Toledo Free Press! Perhaps retirement funding has just become a popular topic; however I’d like to believe the former holds true. On Aug. 13, Paul Merriman wrote “Make Your Kid Rich for $1 a Day” on MarketWatch.com, a piece which reflects the sentiment that we discussed back in May in my piece “Funding Your Retirement.” Financial professionals globally are realizing the importance of investors seeking market exposure at a younger age, but few take the time to run the numbers.

.

In Merriman’s article, he runs the numbers assuming a $1 a day contribution to your child’s investment account. $1 a day for one year is $365 per year, and assuming such contributions are made until the child reaches the age of 18, and the assets are invested and earn 12 percent per year, the child will have $20,348 when they turn 18. Merriman also concludes that the same value could be reached if a one-time investment of $2,700 was made at the child’s birth. Continuing on, if the child were to use the $20,348 to fund an IRA (maxing out her contribution at $5,500 per year) and continued to earn 12 percent, without ever contributing a new dollar, they would have over $4 million before their 67th birthday. He then goes on to assume a few lifestyle choices and how much the now-adult would be able to live off of, leave to heirs, etc.

Paul Merriman is right on point: investing at a young age is the essential key to a happy retirement. Professionals confirm that investing early is equally as important as a rate of return. Bull markets come and go, but we can never get back the lost time that we could have been contributing towards our retirement; those years that our investments could have been compounding are gone forever.

We cannot stress enough the importance of realizing the impact that time can have on your retirement and why starting early is essential to carefree Golden Years. Go online or download an interest calculator app and just play with the numbers for a while, and see just how much you can reward your future self with a little contribution today. The worst thing that you can do for yourself is try to play catchup late in your work career. Let’s assume that after you were hired for your first job that you invested $2,000 per year for the next 40 years of your career at a rate of 12 percent; you would have $1.7 million by the time you retired. Conversely, if you waited and tried to play catch up by investing $10,000 for the last 15 years of your career at 12 percent, you would have a mere $417,000 when you retired.

The French poet Jean de La Fontaine once said that “Patience and time do more than strength or passion.” While he certainly was not referring to investment theory, the principal holds true; time is the one thing that we can never recreate, and once it is gone it is gone forever. Don’t let your time go to waste and take the proper steps today to benefit your future self and your future heirs.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: The tides Are shifting

For months we have been cautioning investors about the dangers we see ahead in the investment world, specifically in the bond market and in the equities markets. While nobody likes a “party-pooper,” we feel it would be a disservice to not point out the problems that we see coming down the road.

.

This week Forbes released an article titled “These 23 Charts Prove That Stocks Are Heading For A Devastating Crash.” In this piece, contributor Jesse Colombo provides data and analysis that your typical investors would never come across that point towards troubling times. We cannot say definitively whether or not we are due for a crash; however a significant correction would not surprise us in the least. The following is just a few pieces of data from the article:

Equities are up nearly 3x since the market bottom in 2009 with no major market correction. (I covered the rise in stocks without a significant correction back in January in “How High Can Equities Go?”)

The Fed Funds Rate has remained at or near 0 percent for over 5 years, and was at a historically low rate right before the Credit Bubble burst in 2008.

NYSE Margin debt is peaking, which it also did during the Dot-Com bubble, the Credit Bubble.

The Volatility Index (VIX) is reaching multi-year lows, which is a sign of complacency that typically precedes a market decline.

Corporate borrowing is reaching the highest levels it has seen since the Credit Crisis, and those levels were the highest seen since the Dot-Com Bubble.

Corporate stock buybacks (financed by borrowing) are also at the highest levels seen since the 2 previous economic bubbles.

Colombo goes in to several other useful analytics that we recommend everyone take a look at.

Regarding bonds, we have been warning investors about the long-term problems with the bond market since 2012 in my piece “Bubbling Bonds.” That article explains the interest rate to par value relationship and how rising interest rates hurt bond funds. In his piece, Colombo pointed out that low yields on 10-year treasury bonds have pushed would-be bond investors into the stock markets in an attempt to earn a return, which has further inflated the equities bubble.

As I said, nobody likes to hear a Negative Nancy, but we find ourselves in that position. Every market fundamental tells us that we are due for an intense if not severe market correction. It has been brewing for over five years, and numerous economists have warned about the negative effects of our current fiscal and monetary policies. That is not to say that the U.S. economy is heading for complete catastrophe; however we are awaiting a market correction unlike any that you have seen in the last five years.

If the market begins on a downward trend, have a strategy in place. Do you want to be out early and miss potential gains, try to time the peak (which is virtually impossible), or sell on the downside when there is less liquidity in the markets than when selling on the upside? Another option is to ride out the correction and see where you end up on the other side; you do have options. If you do not have a plan, now might be the time to devise one. Don’t say we didn’t warn you.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed withFINRAthrough Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: The Fed can’t have you selling your bonds

Very rarely in American history can we look back and say, “Increasing regulation would have solved our problems.” While we support sensible regulations, excessive regulation provides little extra protection and allows for bureaucratic organizations to grow larger, more onerous and gain control over those they are regulating. While the Federal Reserve is not a division of the federal government (although they do work very closely with the Treasury Department), they have been pushing for the Securities and Exchange Commission (SEC) to regulate the bond market, and bond owners may not care for the results.

.

According to the Financial Times, the Fed has been discussing whether or not the SEC should institute an exit fee on bond funds. Essentially, the Fed wants you to have to pay a fee in order to sell your bonds. While some funds do have back-end sales loads, we are talking about something entirely different here; this is the Fed attempting to constrain the free market by initiating regulatory fees.

With interest rates held at historically low and unsustainable levels, investors have been flocking to bonds and debt instruments for the little yield that they provide in the form of interest payments. In bond funds, if interest rates fall, the value of the underlying debt instrument rises, and vice versa, which has produced great results as interest rates have dropped. The idea behind the proposed fee is that sellers will continue to hold the investment rather than pay the fee and sell in panic-driven craze like in 2008 when we saw money market accounts “break the buck,” thus providing liquidity to the bond market.

Since 2008 the Fed has effectively pushed interest rates to historically unprecedented levels in an unsuccessful attempt to spur economic growth. After six failed years, the Fed has now realized that they have created a bond market supported by phony demand, and that there will not be enough investors on the buy side to accommodate a rush of sellers in the event of an uptick in interest rates, and the bond market would see significant losses.

This concoction of policy and regulation has been engineered by a team of academics at the Fed who have little knowledge of anything more than economic theory that appears in text books and not in real world economies. Many of the actions of today’s Fed have never been attempted and therefore have no basis for success. Our policy makers and regulators are flying by the seat of their pants, and are doing more long-term damage by attempting to regulate away another 2008 rather than allowing the free market to pick winners and losers.

We have said before and will say again: regulation is not a bad thing. Not all regulation is bad, but no bad regulation is good. This is an example of a terrible regulation that investors need to be made aware of, and they should be livid. The scary thought is that after the coming market downturn and loss of liquidity in the bond market if exit fees are instituted, policy makers will likely turn to the same incompetent bureaucrats at the Fed and to the SEC to manufacture another misguided solution.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: Federal follies

In the financial field, we track indexes, economic indicators and legislative policy to provide us with a better forecast for the markets. While we remain apolitical when making investment decisions, we certainly have our own individual and independent political beliefs. This week we wanted to discuss six and a half years of the Obama administration’s policies.

.

Beginning in 2008, then-Senator Obama marketed himself as the antithesis to George W. Bush. President Bush’s policies regarding military action in the Middle East as well as his fiscal policies angered both the left side of the aisle and the right. Senator Obama campaigned that it was time for America to change and promised us a path to prosperity. To date, the administration has been plagued by scandals that bring Nixon-era comparisons to mind. Once elected, President Obama made the economy a No. 1 priority, yet we have failed to see any significant improvement in GDP growth or U-6 unemployment, and federal spending has skyrocketed. It is easy to lose sight of all of the irresponsible actions over an administration, but let’s recap all of the follies and briefly describe the implications of each event. Note that these are not in any particular order of importance.

Unemployment: We look at U-6 unemployment data rather than U-3 or U-4, and while we have seen a drop in the last 12 months, U-6 was over 15 percent for 37 consecutive months during the span of 2009-11. Last year’s average unemployment rate according to U-6 was 13.8 percent, which is much better than the 16.7 percent in 2010, but significantly worse than the 8.2 percent average of 2006.

EconomicGrowth: Under this administration, Real GDP Growth has not exceeded 4 percent, which by comparison was above 4 percent from 1996 until the early 2000s resulting from Clinton’s economic policies, and Real GDP Growth jumped to over 8 percent during the Reagan administration. President Obama failed to supply any real economic impact with “Shovel Ready Jobs” and the economy continues to struggle.

Lack of Wall Street Reform: President Obama promised to be tougher on Wall Street, yet we continue to see margin debt on the rise, a lack of oversight in derivatives markets, and criminals such as Jon Corzine of MF Global walk free. Note that while equities are at historic highs, it is our belief that these levels are not indicative of the economy but rather of the low interest rate policies of the Federal Reserve.

The Affordable Care Act: Rammed through Congress on a partisan basis, this was a piece of legislation that the country was not ready for, nor were those in charge of implementing the infrastructure. The healthcare system in the U.S. can certainly be improved; however numerous polls showed that the voters did not want this legislation passed, which led to significant Republican wins in the 2010 midterm elections.

Amnesty: Having witnessed the immigration process in action, it is without question that we could correct the inefficient process for immigrants who want to come to the U.S. to make a better life for themselves and their families. However, blanket amnesty is a slap in the face to those immigrants who went through the formal process, and this administration continues to support amnesty even though a significant portion of the population disagrees.

Fast and Furious: Many have already forgotten about the botched weapons operation that left a U.S. border patrol agent dead and automatic firearms in the hands of dangerous drug cartels. This was a case of a well-intentioned goal that was horribly miscalculated and executed.

The IRS Scandal: The most Nixonian of President Obama’s scandals, details have unfolded showing that the IRS was aware of the targeting of conservative groups. Nixon also abused the IRS which was included in Article II of his impeachment.

The NSA: As privacy becomes a deeper concern for more and more Americans, the revelation of just how deep the NSA’s reach was became a major concern for citizens.

Drone Strikes on Syria: While the president promised a transparent administration, he apparently did not feel transparency was necessary when he issued a drone strike in Syria without congressional approval.

Benghazi: It came to light that this administration put forth a coordinated effort to mislead the public on what caused the attack on the US Embassy in Benghazi resulting in Ambassador Stevens’ death. Many have argued that this as well could be an impeachable offense

With all of these distractions it is no wonder that the economy has failed to rebound. Please note that this list is not intended for taking partisan shots at the president, but rather to point out the mistakes of this administration. There are certainly similar lists that we could make regarding Republican administrations, but we must live in the present, and the shelf life of “blame Bush” has long since expired. President Obama promised a different type of presidency than that of Bush, and so far we have received more of the same. Our fear is that if this administration does not get their act together and focus on the economy, we may be in for a Jimmy Carter type of ending.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: Rising prices and a stalling economy

It seems that any way you look, an anecdotal case for inflation can be made. Consumer Price Index continues to show year over year growth (although not nearly to the levels that they were in 2011), food prices are on the rise, housing prices continue to climb and Americans are paying more at the pump and to their utilities companies.

.

Many may find it interesting that these inflationary price increases are not necessarily a bad thing; if an economy grows by x percent and the monetary base does not grow but stays at the same level, it is easy for an economy to slip into deflation, which can be much more disastrous than inflation. What we must ask ourselves is if price increases are substantiated by economic growth, and what these increases are doing to our economy.

April’s Gross Domestic Product (GDP) report showed a quarter over quarter change of just 0.1 percent growth, and many economists argue that the published figure will be revised down. Remember, inflation can be healthy if we have the economic activity to back up the growth in money supply. However, at 0.1 percent economic growth and food prices expected to rise 3.5 percent this year, the numbers simply do not add up.

Any rational economist has foreseen these problems coming down the pike for years. The United States is not producing nearly enough oil to support our consumption and excessive regulation has hampered the coal industry, both of which have raised our overall energy costs. The harsh winter has resulted in a recent spike of agricultural goods, causing food prices to jump at the grocery store, impacting consumer spending as well. We must also not forget the excessive growth in the money supply following the Troubled Asset Relief Program (TARP) and the Federal Reserve’s quantitative easing programs.

While nondiscretionary costs are continuing to rise, these same factors (mostly attributed to TARP and Quantitative Easing) have resulted in equities hitting never-before-seen highs. Historically, a low interest rate environment is good for the stock market. However, this low interest rate environment has diminished the earning power of seniors on CDs, bonds or other interest bearing investments.

What we now must ask is if we see ourselves entering a Liquidity Trap. Liquidity Traps occur when monetary policymakers lower interest rates in an effort to spur economic growth, but the policies remain ineffective. These policymakers are then left with few to no options for how to jumpstart growth. I believe that this is exactly what we are seeing: prices are rising, GDP is stalling, interest rates cannot go much lower and the investing public turns a blind eye to the problem and focuses on a record high Dow Jones instead.

This nation has a serious economic problem at hand; rates are incredibly low and have remained as such in an effort to encourage growth. However low rates mean nothing if businesses are utilizing cash reserves and banks are not lending. The Federal Reserve and our politicians have created the environment in which we find ourselves and now we must take our medicine. It is time for rates to rise, which will hopefully encourage borrowing before rates climb any higher. This rate increase will likely shrink money supply slightly and may cause equities to sell off. (Many would argue a long overdue correction is in store.) The economic environment that we find ourselves in now is not sustainable for an extended period of time, and the time to fix the problem is now.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: Where should I put my money?

When we run in to people on the street, we are typically asked two different types of questions. Some ask us where they should put their money, searching for stock tips or economic advice. Others ask us where they should put their money, speaking from a structure standpoint.

It is frustrating as a financial professional that our junior highs and high schools teach students all of the science and mathematics fundamentals while ignoring investment fundamentals. This week we wanted to provide a short outline of the difference between numerous investment structures. As a note, this is a simple, brief outline and we suggest that anyone with questions consult a professional before making a decision.

.

Checking Account

The most simplistic investment vehicle that one can have is a checking account. Checking accounts allow owners to store their wealth and allow them instant access to cash. The downside is that, while you will not lose money in your checking account, that money is not being put to work for you either. You will not earn on it. Checking accounts are best suited for when you need money at a moment’s notice for bills, groceries, etc.

Savings account

Savings accounts are also liquid investments and will pay a small interest rate on your balance. These deposits allow banks to supply capital to businesses or individuals seeking loans. Much like checking accounts, money in savings accounts will not provide you with market exposure. These accounts are best suited for money that you will need in the near future for larger expenses, such as purchasing a car or a down payment on a home.

Personal investment accounts

Otherwise known as a non-qualified account, these accounts allow you to contribute money and invest in stocks, mutual funds, CDs, etc. Invesmtents in this structure provide you with the opportunity to put your money to work for you and earn a rate of return. Depending on the investment, some assets held in personal accounts may not be immediately liquid, however stocks and mutual funds are liquid investments. These accounts are also subject to market risk.

Joint Tenants with Rights of Survivorship

Commonly referred to as joint accounts, these accounts function identically to personal investment accounts, however they are intended for two adults to share ownership in the account. The only downside is that as an owner of a joint account, you legally only own half of the assets in the account, which can make splitting the account up in the event of a divorce or separation a messy proposition.

IRAs

Individual Retirement Accounts allow for employed individuals with earned income to invest for their retirement. While traditional IRAs provide an immediate tax write off, Roth IRAs allow earnings to grow tax-free (the purpose of this section is not to debate traditional and Roths as each has their own benefits and downsides). While these investments provide a great means to save, a tax benefit and market exposure, they are an illiquid investment and cannot be withdrawn until age 59 ½ without penalties (unless for special circumstances such as health needs).

401(k)

401(k) plans operate much like IRAs, the difference being that these plans are sponsored by an employer and subject to various different levels of regulation and scrutiny. Some 401(k) plans even provide matching provisions for employees who choose to participate. One unique facet of 401(k) plans that differs from IRAs is that some 401(k) plans allow the participant to borrow against the balance of the account. While this may be viewed as a benefit, we suggest avoiding this option. In the event of termination of employment, those loan balances must be repaid with 90 days or will be taxed as ordinary income and may face early withdrawal penalties.

Annuities

Annuities are an investment that allows owners to lock in a guaranteed rate of return. Variable annuities also allow investors the possibility to earn more than their guaranteed rate of return, depending on market conditions. While many investors feel comfortable with the guarantee, there is certainly a high price tag in the form of fees (comparative to other investments) that one pays for such a guarantee.

Life insurance

Life insurance provides a protection against loss of income due to death. Think of buying car insurance as a protection against your car being totaled in an accident; the same logic applies to life insurance. While life policies can provide income for wife, kids, family, etc. in the event of death, individuals with no spouse and no children likely do not need a policy, much like individuals who do not own a car do not need car insurance.

We hope that this brief crash course provided some basic insight on different investment options. One of our mottos is that there is no right choice and there is no wrong choice, only options. We highly recommend utilizing several of these options to help ensure a fulfilling and successful retirement.

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

Treece Blog: A manipulated economy

Financial and market manipulation occurs in many forms, be it a central bank guiding market prices, as has been the case in the precious metals markets over the last few years, by traders utilizing technological advancements such as high-frequency trading, or entities triggering sell/buy orders by taking significant short/long positions.

.

This week, MarketWatch.com released an article detailing revelations by the chief market strategist for LPL Financial, Jeffrey Kleintop, regarding interest rates and their ability to indicate recessions. The article raised an interesting thought: Are economic indicators valid in a manipulated economy? Our belief is that investors must look past the data at face value.

Kleintop discusses the yield curve in his piece and its historical relevance in foreshadowing recessions. A normal yield curve shows that the longer the duration of a debt instrument, the greater the yield. An inverted yield curve is when short term debt instruments have a higher yield than longer duration debt. For example, 10 year treasuries are paying 2.6 percent right now. If three-month T-bills were paying more than 2.6 percent, that would signal an inverted yield curve.

It is no secret that the Federal Reserve has been keeping interest rates artificially low for an unreasonable amount of time in an effort to jump start the economy. These artificially low rates have failed to have any significant economic impact (as proven by lackluster GDP numbers), have decimated the earning potential of retirees that rely on interest bearing instruments for income, and have altered the yield curve. What would happen if short duration yields did in fact rise above long duration yields?

Some economists argue that an inverted yield curve in today’s market bears no meaning, as the laws of supply and demand will prevail and that foreign demand for our debt will result in declining long duration yields, opposed to signifying a coming recession. However, Kleintop does have some historical precedence backing his case that an inversion could lead to a recession.

In his piece, Kleintop points out that since 1967 the yield curve has started to invert on seven different occasions, and each time the economy went into a recession 18 months or less from when the inversion began. We have made our case that we are likely much closer to a recession now than one would believe, based off of high unemployment numbers, soft retail sales and overall economic sluggishness as evidenced by the most recent GDP report. While equities continue to historic highs, the earnings have little to do with overall economic trends and more to do with easy money policies from the Federal Reserve driving the markets higher.

As money managers we rely on economic data to forecast the markets; however that job is made significantly more difficult when we learn that data is often misrepresented. As markets and data continue to be manipulated, assessing traditional indicators has proven unreliable. While economic reports are a good basis, anecdotal evidence will always be the trump card when evaluating the economy. As the saying goes, “It’s not what you know, it’s what you think you know that isn’t so.”

Ben Treece is a 2009 graduate from the University of Miami (Fla.), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.